Avoid these luxury retail brands

Commentary: Strategy missteps could cost these retailers

By

MargaretBogenrief

CHICAGO (MarketWatch) — In 2013, many retailers, particularly those in the luxury space, are finding themselves in a difficult position, caught between pricing and profitability.

While higher prices may automatically trigger dreams of high revenues and higher profitability, there are, interestingly, some luxury brands that, lured in by the seemingly promising formula of “lower prices equal more consumers,” now find themselves with less revenue, lower profits, and fewer shoppers.

Here are three luxury brands that, in trying to be all things to all customers, risk losing even more market share in 2013.

Tiffany & Co.

Tiffany’s
TIF, -0.65%
may, at first sparkle, seem like an odd choice for this list: over the past two years, the luxury retailer’s revenue (and gross margins) have been steadily increasing, jumping from about $2.08 billion in total revenue in 2009 to about $3.64 billion two years later. Even more telling, while trading at 3.3x its tangible book value, the retailer’s shown investors a five-year earnings per share growth rate of more than 11%.

Luxury retail brands to avoid in 2013

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Some luxury retailers find themselves in a difficult position in 2013 after strategy missteps that have left them with less revenue, lower profits, and fewer shoppers.

But by December 2012, Tiffany’s outlook turned blue, and 2013 looks like the jeweler will remain in (relative) neutral. In particular, “sales gains were modest in Tiffany’s key markets, even falling 2% at its Fifth Avenue flagship in November and December,” Reuters reported, and “while Tiffany & Co. Chief Executive Michael Kowalski cited ‘uncertainty’ about the economy in all of its major markets as the reason Tiffany is planning ‘conservatively’ for next year’s sales growth,” there exists a more significant and strategic reason behind Tiffany’s potential 2013 decline.

Back in the mid-2000s, while retailers like Target were climbing through aspirational and innovative designs, brands like Tiffany and Coach (detailed below) decided to move in the opposite direction, down the exclusivity ladder, through heavily-branded products meant to appeal to college girls and aspirational shoppers seeking to sport the Tiffany-branded product without shelling out historic Tiffany-brand prices.

Consequently, in trying to appeal both aesthetically and financially to the growing, pre-crash upper middle-class, Tiffany’s ended up diluting its brand to those traditionally accustomed to the exclusiveness of the little blue box.

Unfortunately, after the financial world fell apart in 2008, housing prices collapsed, suddenly $225 necklaces weren’t on the shopping list of the middle class. This coincided with Tiffany’s “traditional,” higher-end customer fleeing for the likes of Bulgari and its ilk. Without meaning to, Tiffany’s brand has slowly devolved into an upper-middle class brand of aspirational jewelry couture; as long as the global economy stagnates, so will Tiffany’s profitability. A Tiffany spokesman didn’t respond to a request for comment.

Once an exclusive purveyor of luxury leather goods, Coach has since become the “must-have” branded bag for club girls, suburban housewives, and college students. Lost amongst gigantic C-logoed gear and neon, seasonal wristlets, Coach has lost its “exclusive” edge, that delicious luxury sheen that once defined the brand. And it shows in the financial details: by Jan. 22 of this year, Coach closed “at a 5.8% discount to the Standard & Poor’s 500 Index on a price-to-earnings basis, the lowest in more than three years.”

Coach

A Coach bag with the “C” logo.

And while Coach reintroduced its Legacy collection this past holiday season in an attempt to buff out the rough spots on its reputation, but the throwback luxury line wasn’t enough, and sales fell. Furthermore, the brand’s recent announcement (in reaction to its shrinking presences in the luxury marketplace) that it’s going to dip its fashionable toe further into women’s apparel market could further devastate the brand’s healthy and competitive (72%) gross margins.

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